Let’s talk about austerity. No, not the austerity proposed in Greece (although I’m probably the only one not writing about Greece). Rather, I’m talking about personal austerity. I frequently recommend that families develop an austerity budget. Let’s describe what this is and how it might help you.
In a budgeting sense, “austerity” refers to sharply curtailing spending in a time of financial crisis. Your family’s austerity budget is a plan you can put into effect in the event you lose your job or encounter some other financial hardship. Creating an austerity budget involves calculating the minimum amount of money you would need monthly or weekly to live indefinitely. I like to use this definition because it is the most practical minimum budget, as we will see in a moment. Here is what it should include:
- Rent or mortgage
- Basic utilities
- Car payments
- Debt payments (credit cards or student loans)
- Any miscellaneous ongoing expenses that can’t be eliminated
Just as important is what it should not include:
- Savings or investment expenses
- Vacations or travel
- Dining out
Since your austerity budget is meant to last indefinitely, you need to be realistic about what you will spend. For instance, it does no good to lop out all restaurant expenses if you know you won’t have the willpower to break your daily Starbucks habit. Be realistic — maybe even try living on your austerity budget for a month or two. If you find that life is unbearable without, say, your daughter’s dance lessons, then go ahead and include them in your budget. You might be able to live on a bit less than this budget for a short time, but not indefinitely.
Your austerity budget and an emergency savings account are your sword and shield against financial adversity. When crisis hits, you should know what your austerity budget is and what steps you need to take to get there quickly — such as cutting off cable TV or suspending your kids’ day care. This will maximize the amount of time you can live off your emergency savings.
For some, this might be a relatively straightforward exercise. If you’re single, you might find that your austerity budget is fairly easy to get to. Others with different obligations, such as supporting a family, may find that getting down to their austerity budget requires more action. You may also find that there are issues you should address now, so if there ever is an emergency, the people depending on you won’t be surprised by their circumstances.
I find that there is an added benefit to understanding your austerity budget. As you save and invest over your lifetime, you may find that you have socked away enough money that you could safely withdraw from your accounts an amount equal to your austerity budget. Using simple parameters like the 4% rule, you may find that you already have enough money to live a simple life indefinitely just based on your investments. Many people find peace of mind in knowing this. An austerity budget could be the true start of financial independence.
Written by NerdWallet of Money